(Updates prices)
* Canadian dollar falls 0.6 percent against the greenback
* Loonie touches a two-month low at 1.3457
* Price of U.S. oil falls 0.6 percent
* Bond prices rally across the yield curve
By Fergal Smith
TORONTO, March 6 (Reuters) - The Canadian dollar weakened to
a two-month low against its U.S. counterpart on Wednesday after
a more dovish tone from the Bank of Canada drove the gap between
Canadian and U.S. yields to the widest in more than a decade.
The gap between Canada's two-year yield and its U.S.
equivalent began to move wider on Friday after data showing that
Canada's economy barely expanded in the fourth quarter.
On Wednesday, the spread widened by 2.5 basis points to
about 84 basis points in favor of the U.S. bond, its widest
since February 2007.
"Today, more dovish-than-expected commentary has been
triggering the market again ... the FX side has caught up with
that rate spread," said Amo Sahota, director at Klarity FX in
San Francisco.
Faced with a slowing global and domestic economy, the Bank
of Canada held interest rates steady as expected and said there
was "increased uncertainty" about the timing of future rate
increases.
At 4:18 p.m. (2118 GMT), the Canadian dollar was
trading 0.6 percent lower at 1.3432 to the greenback, or 74.45
U.S. cents. The currency touched its weakest intraday level
since Jan. 4 at 1.3457.
The decline for the loonie came as data showed that Canada
racked up a record trade deficit in December and that the pace
of purchasing activity slowed in February to its weakest in five
months.
Also, U.S. crude oil futures settled down 0.6 percent
at $56.22 a barrel after U.S. government data showed a sharp
build in crude inventories. Oil is one of Canada's major
exports.
A former key aide to Prime Minister Justin Trudeau, who is
at the center of a major political crisis, denied on Wednesday
he had pressured the then-justice minister to allow a major
company to avoid a corruption trial last year.
"It is another election year and politics will be important.
... I think it has the potential to weigh on sentiment a little
bit for international traders," Sahota said.
Still, currency strategists expect the Canadian dollar to
strengthen over the coming year, helped by rising investor
appetite for risk.
Canadian government bond prices were higher across the yield
curve, with the 10-year rising 50.4 Canadian cents
to yield 1.820 percent. The 10-year yield touched its lowest
intraday since June 2017 at 1.790 percent.
Canada's employment report for February is due on Friday.
(Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter
Cooney)